BY-MR. SATWINDER SINGH

PARTNER

© 2013 Vaish Associates Advocates. All rights reserved.

Raising of Foreign Funds in India – A Brief Overview

FDI

Foreign Investments

PIS FVCIOthers (G-

Sec, NCDs, etc.

Investments on non-repatriable

basis

Automatic Approval

FII NRIs, PIO, QFIs

SEBI regd. FVCIs

VCF, IVCUs

FII NRIs, PIO, QFIs

NRIs, PIO, QFIs

Raising of Foreign Funds in India – A Brief Overview

ECB

Borrowings

FCCB FCEB

Raising of Foreign Funds in India – Key Issues

• Foreign Investments Route:- Sector specific conditions;- Sectoral caps;- Indirect foreign investment; - Pricing guidelines, etc.

• Debt Route:- Recognized lender;- Eligible borrower;- All-in-cost ceiling;- End-use restriction, etc.

• Adequate Security to the Foreign Investor

Foreign Direct Investment Route– Key Issues

• Sector specific conditions:- Construction Development: Townships, Housing, Built-up infrastructure - 100 % (Automatic Route)

• Minimum area to be developed under each project would be as under: (i) In case of development of serviced housing plots, a minimum land area of 10 hectares;(ii) In case of construction-development projects, a minimum built-up area of 50,000 sq.mts;

(iii) In case of a combination project, any one of the above two conditions would suffice.

• Minimum capitalization of USD10 million for wholly owned subsidiaries and USD 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company.

• Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. Original investment means the entire amount brought in as FDI. The lock-in period of three years will be applied from the date of receipt of each instalment/tranche of FDI or from the date of completion of minimum capitalization, whichever is later. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.

• At least 50% of each such project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor/investee company would not be permitted to sell undeveloped plots. For the purpose of these guidelines, “undeveloped plots” will mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under prescribed regulations, have not been made available. It will be necessary that the investor provides this infrastructure and obtains the completion certificate from the concerned local body/service agency before he would be allowed to dispose of serviced housing plots.; and other conditions.

Foreign Direct Investment Route– Key Issues

• Sector specific conditions:- Multi-brand Retailing - 51 % (Approval Route)

Minimum amount to be brought in, as FDI, by the foreign investor, would be USD 100 million;

At least 50% of total FDI brought in shall be invested in 'backend infrastructure' within three years of the first tranche of FDI, where “back-end infrastructure” will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.;

At least 30% of the value of procurement of manufactured/ processed products purchased shall be sourced from Indian 'small industries' which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. This procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured/ processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis;

Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading;

Approved in limited States of India; and other conditions.

• Structure under investigation : Marks and Spencer India Issue (sub-brands vs. multi-brands)

Foreign Direct Investment Route– Key Issues

• Sector specific conditions:- E-commerce activities

• 100% permitted under automatic route under B2B format for wholesale trading;

• Not allowed for retail trading.

• Questionable Structure – Flipkart Issue

equity investments

100%100%

Supply of goods license “Flipkart”

Foreign Investors

Flipkart Online Services

(WC & C Co.)

WS Retail Services (Licensed brand

“Flipkart”(E-commerce Retail Co.)

Flipkart India Pvt. Ltd.

(Owner of brand “Flipkart”)

Indian Partners

Foreign Direct Investment Route– Key Issues

• Sectoral cap restrictions:- Transfer of ownership or control of existing Indian companies from Indian residents to non-residents in sectors which have

prescribed sectoral caps would require prior FIPB approval in all cases.

- Where an Indian company is being established with foreign investment and non-resident ownership or control of such company is contemplated in sectors which have prescribed sectoral caps, then prior FIPB approval will be required.

- - The aforesaid provisions would not be applicable where 100% FDI is permitted under the automatic route.

Indirect Foreign Investment – Key Issues

X(Indian company in Telecom Sector)

98%

Y(Indian listed company with foreign

investment)

Pricing Guidelines – FDI Scheme

Pricing Mechanism:

• Companies , if listed on a recognized stock exchange in India- The price worked out in accordance with the SEBI guidelines, as applicable;

• Companies , if not listed on a recognized stock exchange in India- The fair value to be determined by a SEBI registered Category-I merchant banker or a chartered accountant as per the

discounted free cash flow method.

Pricing Guidelines:

• Issue of capital instruments to non-resident investor: Minimum benchmark• Transfer of capital instruments by resident to non-resident : Minimum benchmark• Transfer of capital instruments by non-resident to resident : Maximum benchmark

Foreign Direct Investment – Key Reporting Compliances

• Issue of capital instruments:- Advance Reporting Form: To be submitted to the RBI, through the AD Bank, by the Indian company within 30 days from the

date of receipt of the consideration under the FDI Scheme [along with copy of (a) foreign inward remittance certificate; and (b)know your customer report];

- Form FC-GPR: To be submitted to the RBI, through the AD Bank, within 30 days from the date of issue of capital instruments by the Indian company under the FDI Scheme. Form FC-GPR has to be duly filled up and signed by Managing Director/Director/Secretary of the Company and submitted to the AD bank, who will forward it to the RBI. The following documents have to be submitted along with the form:

A certificate from the Company Secretary of the company certifying that: (A) all the requirements of the Companies Act, 1956 have been complied with; (B) terms and conditions of the Government’s approval, if any, have been complied with; (C) the company is eligible to issue shares under these Regulations; and

(D) the company has all original certificates issued by authorized dealers in India evidencing receipt of amount of considerationNote: For companies with paid up capital with less than Rs.5 crore, the above mentioned certificate can be given by a practicing

company secretaryA certificate from statutory auditor or chartered accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India

- The capital instruments should be issued by the Indian company within 180 days from the date of receipt of the inward remittance received through normal banking channels including escrow account opened and maintained for the purpose or by debit to the NRE/FCNR (B) account of the non-resident investor.

Foreign Direct Investment – Key Reporting Compliances

• Transfer of capital instruments:

- Form FC-TRS: To be submitted to the RBI, through the AD Bank, within 60 days from the date of receipt of the amount of consideration by the transferor of shares. The form is required to be submitted by the transferor or the transferee,

whosoever is resident in India. Recording of the transactions under the FDI Policy in the company’s books and records – specially recording the transfer of shares from a resident to a non-resident or vice-a- versa only after Form FC-TRS is approved by the AD bank.

• Annual Filing:- Annual return on Foreign Liabilities and Assets: To be submitted to the RBI by 31st of July every year.

Debt Route (ECB Guidelines) – Key Issues

• Recognized lender: (Automatic Route)

- International Banks; - International capital markets;- Multilateral Financial Institutions; - Export credit agencies;- Supplier of equipments;- Foreign Collaborators; - Foreign Equity Holders (except OCBs):

For ECB up to USD 5 million - minimum paid-up equity of 25 % held directly by the lender, For ECB more than USD 5 million - minimum paid-up equity of 25 % held directly by the lender and ECB liability equity ratio not exceeding 4:1

• Eligible borrower: (Automatic Route)- Corporate (including those in hotels, hospital, software sectors); - IFC (except financial intermediaries); - Units in SEZ; - NGOs (engaged in microfinance); - MFIs (engaged in microfinance)

Debt Route (ECB Guidelines) – Key Issues

• All-in-cost ceiling:All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.

• End-use not permitted:

Other than the purposes specified, the borrowings shall not be utilized for any other purpose including the following purposes, namely:- For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate [investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs), etc., are also considered as investment in capital markets];- for real estate sector;- for working capital, general corporate purpose and repayment of existing Rupee loans.

• No ECB for Construction Development: Townships, Housing, Built-up infrastructure

• Liberalization under Approval Route: Repayment of existing rupee loan

External Commercial Borrowings– Key Reporting Compliances

Form 83: For allotment of LRN, borrowers are required to submit Form 83, in duplicate, certified by the CS or CA to the AD bank .One copy to be forwarded to the RBI. The borrower can draw-down the loan only after obtaining the LRN from the RBI

ECB-2: To be submitted to the RBI, through AD bank, on monthly basis within 7 working days from the close of month to which the ECB relates

Creation of Security – Key Issues

• Pledge of shares:No objection from AD Bank in India in the followings cases:

- Promoter of an Indian company (borrowing company), which has raised ECB, may pledge the shares of the borrowing company or that of its associate resident companies for the purpose of securing the ECB raised by the borrowing company, subject to conditions;

- Non-resident holding shares of an Indian company, can pledge these shares in favour of the AD bank in India to secure credit facilities being extended to a resident investee company for bonafide business purpose , subject to conditions;

- Non-resident holding shares of an Indian company, can pledge these shares in favour of an overseas bank to secure the credit facilities being extended to the non-resident investor / non-resident promoter of the Indian company or its overseas group company, subject to conditions, including : loan is availed of only from an overseas bank; loan is utilized for genuine business purposes overseas and not for any investments either directly or indirectly in India; overseas investment should not result in any capital inflow into India, etc.,

Automatic Route:

- An Indian party may pledge the shares of overseas JV / WOS to an AD bank or a public financial institution in India for availing of any credit facility for itself or for the JV / WOS abroad. Indian party may also transfer by way of pledge, the shares held in overseas JV/WOS, to an overseas bank provided that the total financial commitments of the Indian party remain within the limit stipulated by the RBI for overseas investments, from time to time.

Creation of Security – Key Issues

• Charge on Immovable Property:An Indian company (borrowing company) may create charge on its immovable properties in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrowing company provided it procures NOC from an AD bank in India and subject to conditions, including that in the event of enforcement / invocation of the charge, the immovable asset (property) will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.

• Personal Guarantee/ Corporate Guarantee:Issuance of personal guarantee/corporate guarantee in favour of overseas lender / security trustee, to secure ECB to be raised by an Indian borrowing company provided the borrowing company procures an NOC from an AD bank in India and subject to conditions.

Case Study: I - Strategy

Deposit (IA)

London

=========================================================================== Secured Loan (IA) – Pledge of shares of P by R

WoS equity infusion WoS Singapore

===========================================================================

secured loan subsidiary

collateral security India

BankLender

A (Private Limited Co.)

P

Q(Target Co.) R

S

Case Study: II - Strategy

20% IA Deposit Overseas

49 % equity + Loan/NCD (IA)

Lien on 20 % IA Deposit

51% 80% of IA (CCD)

===========================================================================

76% India

InvestorZ

(New Co.)

X Y(Target Co.)

Bank

Overseas Direct Investments (Multi-layered Structures)– Key Issues

India

=============================================================WoS========================================================

Mauritius

=============================================================80%========================================================

Netherlands

WoS==================================================================================================================

UK

Q

(SPV)

R

(SPV)

P

S (Target Co. – Operating

Co. (Sector under Approval Route )

Overseas Direct Investment– Write – off Compliances

• Indian promoters who have set up WOS abroad or have at least 51 per cent stake in an overseas JV, may write off capital (equity / preference shares) or other receivables, such as, loans, royalty, technical knowhow fees and management fees in respect of the JV /WOS, even while such JV /WOS continues to function as under:

Listed Indian companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Automatic Route; and

Unlisted companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Approval Route.

• Reporting : - To be reported to the RBI, through the AD bank, within 30 days of write-off/ restructuring. The write-off / restructuring is subject to the condition that the Indian Party should submit the following documents for scrutiny along with the applications to the designated AD Category –I bank under the Automatic as well as the Approval Routes: a) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; andb) Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.

Overseas Direct Investment– Key Reporting Compliances

(a) Investment in capital instruments of overseas JV/WoS; (b) Extension of loan to overseas JV/WoS; (c) Extension of guarantee on behalf of overseas JV/WoS : by Indian party- Form ODI : Part I and Part II to be submitted to the RBI, through the AD bank, within a period of 30 days from the date of the transaction;

Submission of share certificates to AD bank:- Receive share certificate or any other document as an evidence of investment in overseas JV/WoS within 6 months from (a) the date of effecting remittance; or (b) the date on which the amount to be capitalizedbecame due to the Indian party; or (c) the date on which the amount due was allowed to be capitalized; and submit the same to ADBank.

Annual Filing: Form ODI: Part III (APR) to be submitted to the RBI, through the AD bank, on or before the 30th of June each year. The APR, so required to be submitted, has to be based on the latest audited annual accounts of the overseas JV / WOS, unless specifically exempted by the RBI.

Post investment changes / additional investment in existing JV / WOS: Letter to be submitted with the RBI reporting the details of such decisions within 30 days of the approval of those decisions by the competent authority of the JV / WOS concernedin terms of local laws of the host country and include the same in the APR (Form ODI –Part III)

Report on Closure / Disinvestment / Voluntary Liquidation /Winding Up of JV / WOS: Form ODI : Part IV to be submitted to the RBI, through the AD bank, within 30 days from the date of disinvestment.